"As we look ahead to the second half of the year, we expect that the macroeconomic environment in our region of the country will continue to lag the national numbers and anticipate an intensely competitive retail environment during the third and fourth quarters," Efird continued. "Expecting little benefit from the economic environment, we have accelerated several major merchandising initiatives, increased our marketing spend for the third and fourth quarter print and electronic media, and have increased the pace of pharmacy acquisitions – all directed at adding and rebuilding customer traffic. At the same time, we are continuing our real estate expansion with approximately 20 new store and pharmacy openings set for the back half of the year. We remain confident in our forecast that earnings will increase 10% to 20% for the full year as we continue to build a stronger foundation for Fred's in 2012 and beyond."

Fred's gross profit for the second quarter of 2012 increased 4% to $131.8 million from $126.9 million in the prior-year period. Gross margin for the quarter remained flat at 28.0% compared with the same quarter last year. Gross profit for the first half of 2012 increased 6% to $279.6 million from $264.9 million in the prior-year period. Gross margin for the six-month period improved to 28.8% compared with 28.3% in the prior-year period, with the 50 basis points improvement being driven by higher pharmacy department gross margin.

Selling, general and administrative expenses for the quarter, including depreciation and amortization, deleveraged 110 basis points to 27.3% of sales from 26.2% of sales in the prior-year quarter. For the first half of 2012, selling general and administrative expenses deleveraged 90 basis points to 26.7% from 25.8% of sales in the first half of 2011. The deleveraging in the quarter and year-to-date periods was primarily attributable to increased depreciation and amortization, large increases in health insurance costs, and higher store labor and occupancy costs.

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